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Three Reasons To Divorce Your Bank Before Bankruptcy

By Cathy Moran

 

3799375512_4878094ffd_zBanks do funny things when a customer files bankruptcy.

Only many are not so funny.

Whether your relationship with your bank has been good or not, there may be grounds for divorce before you file your bankruptcy case.

Or at least consider whether there are grounds for a separation.

Set off

Your bank owes you the money you’ve deposited with them.  Heady to think of Bank of California as being in your debt, eh?

If you owe them money on a personal loan or a car loan, you are their debtor.

The bank has the right under common law to take what it owes you to pay what you owe them.

That’s called set off, or sometimes, off set.

Further, that right to take the money in your account to pay your debt to the bank makes the bank a secured creditor when you file bankruptcy.  Secured creditors have rights in their collateral that survive the bankruptcy case.

While your bank is free to set off at any time, a bankruptcy notice is likely to trigger set off.  All of a sudden, “your” money in the bank is now the bank’s money.

Not good.

Action item:  either close the account or take the balance down to an amount you can live without on the day you file bankruptcy.  Money you earn after bankruptcy is safe as a matter of law from off set against a debt you owed from before bankruptcy.

Frozen

Several banks, most notably Wells Fargo, freeze bank accounts with significant balances on getting a bankruptcy notice.

No matter that the money is claimed exempt.  No matter that it’s necessary to pay bills.  It gets frozen.

The bank claims to be “helping” the Chapter 7 trustee.  Even before the trustee asks for help.

The account can be unfrozen, with instructions from the trustee.  But that’s not always available quickly or easily.

Avoid the chill:  divorce Wells Fargo and like-minded banks, or reduce the amount on deposit.

Shut out

The third trick in the bank’s arsenal is to block access to electronic records online and to cut off electronic banking access.

This is inconvenient, but not harmful in the long term.

The banks seem to be quick to cut off your access to your information, but just try to get them to permanently stop a previously authorized debit to your account.  Sometimes closing the account is the only thing that will stop the automatic debt, and I’ve seen attempts to stop ACH’s result in overdraft charges, as the bank paid it anyway.

Credit unions are notorious for terminating the membership of anyone who files bankruptcy and discharges a debt to the credit union.

Revisit paper:   have hard copies of account numbers, payment addresses and monthly payments before your case is file.

Make new friends

Consider opening new accounts or, at minimum, reducing your balances at your present institution before your bankruptcy case is filed.  Your economic life during bankruptcy will be easier.

Divorce is difficult, but you can forge new (banking) relationships.

Image:  Chris Griffith and Flickr

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Filed Under: Managing Money

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Comments

  1. Minneapolis Bankruptcy Law Firm says

    April 8, 2013 at 10:27 am

    Helpful post, and great blog with quality resources for bankruptcy filers/potential filers. Thanks for going through the options here on either maintaining or severing bank relationships.

  2. Mathew says

    May 1, 2013 at 10:25 am

    Is this only an issue where a debtor seeks to discharge a claim owed by a bank?

    Or can this happen even where a debtor fails to list a bank on his mailing matrix (and does not seek discharge from the bank)?

    • Cathy Moran says

      May 1, 2013 at 11:19 am

      The freeze issue is unrelated to debts to the bank. Set off and disabling electronic banking are usually tied to mortgage debts to the bank that will survive the bankruptcy filing.

About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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